Equalisation Levy on Digital Advertising Services- A complete Section-wise Analysis

Introduction:

Over the last few years, the role of information technology in the business has grown manifolds. The advent of 4G & 5G technologies have also supported digital transition of businesses. Nowadays, the business may be conducted through digital mediums and that too without crossing the territorial boundaries. The traditional rules of taxation based on residency rules or permanent establishment thus fails in such scenario. The e-commerce giants have been earning huge profits without paying commensurate taxes in any country. As such, a strong need was asserted by the international community to tackle the taxation issues in transactions conducted in cyber space. Therefore, the Organisation for Economic Co-operation and Development (OECD) under its BEPS project recommended a withholding tax on payments for digital goods and services provided by foreign e-commerce operators.

In consequence, the Finance Act 2016 introduced equalisation levy on procurement of digital advertising services from non-residents with effect from 01-06-2016 on the recommendations of BEPS Action Plan. The scope of equalisation levy is further expanded by Finance Act 2020 to cover non-resident e-commerce operators. In this article, we will have a detailed study of the provisions of equalisation levy on digital advertising services in India.

Charge of Equalisation Levy on Specified services- Section 165

A large number of people in India procures digital advertising services from platforms like Facebook, Yahoo, Youtube etc. and makes payment to them for services so obtained. These platforms are non-residents in India and they do not have a permanent establishment in India. Though the Indian residents procuring advertising services from them get deduction for advertising expenses while calculating their taxable income but advertising income arising to non-resident digital platforms remain untaxed in India.  To tax such digital advertising services by way of equalisation levy, section 165 has been inserted by Finance Act, 2016.

What is Equalisation Levy

‘Equalisation Levy’ means the tax leviable on consideration received or receivable for:
(a) Any specified services (Finance Act 2016) or
(b) E-commerce supply or services (Finance Act 2020)

Which specified services are covered under equalisation levy

Following ‘Specified Services’ are covered under equalisation levy:
(a) Online Advertisement
(b) Any provision for digital advertising space or
(c) Any other facility or service for the purpose of online advertisement and
(d) Includes any other notified services

What is the effective date of applicability of equalisation levy

Equalisation Levy under section 165 is to be charged effectively from 01^st June 2016.

When is equalisation levy applicable under section 165

Equalisation Levy shall be chargeable in respect of consideration received or receivable by a non-resident from providing specified services to a person resident in India and carrying on business or profession or a non-resident having a permanent establishment in India.

What is the rate of Equalisation Levy under section 165

The rate of Equalisation Levy is 6% of the amount of gross consideration paid or payable specified services. For example: X Limited based in Delhi advertises for its business through Youtube. The gross consideration for such advertising services is Rs. 10 Lakhs payable to Youtube in the Financial Year 2019-20. X Limited therefore, will deduct Equalisation Levy of 6% i.e. Rs. 60,000 and pay balance Rs. 9,40,000 to Youtube as net consideration.

Suppose, X Limited has already paid Rs. 10 Lakhs to Youtube and later comes to know about the levy. In this case, it will gross up the amount paid to Youtube Rs. 10 lakhs as:- 10 lakhs * 100/94 = Rs. 10,63,830. The Gross consideration to Youtube will be taken as Rs. 10,63,830 and Equalisation Levy payable as Rs. 63,830.

What is the minimum threshold limit for deduction of equalisation levy under section 165

Equalisation Levy shall be chargeable only where the aggregate amount of consideration for specified services exceeds Rs. 1 Lakh.

Is equalisation levy chargeable when an individual procures online advertising services for personal purposes

Equalisation Levy is not chargeable where the payments for online advertising services are made for personal purposes.

When is Equalisation Levy not applicable

In the following three cases, the provisions of Equalisation Levy are not applicable:
(1) Where the non-resident providing the specified service has a permanent establishment (PE) in India and the specified service is effectively connected with such permanent establishment;
(2) Where the aggregate amount of consideration for the specified services does not exceed Rs. 1 Lakh;
(3) Where the payment for specified services by the person resident in India, or the PE in India is not for the purposes of carrying out business or profession.

Who is liable to deduct Equalisation Levy

Under section 166 of the Income Tax Act, the responsibility of deducting and depositing Equalisation Levy has been cast upon the person who is procuring online digital advertisement services (specified services) from a non-resident. The person procuring the specified services are:
(a) A Resident Indian carrying on a business or profession or
(b) A non-resident having a permanent establishment in India

What is the due date of depositing Equalisation Levy

The Equalisation Levy deducted during any calendar month shall be paid to the credit of Central Government by the 7^th day of the next month in Challan no. ITNS 285. For example: If Equalisation Levy is deducted on 12^th April, 2021, the same should be deposited on or before 7^th May, 2021.

What are the consequences of delay in depositing Equalisation Levy

In case of delay in depositing Equalisation Levy, the person liable to pay:
(a) Such Equalisation Levy shall pay such Levy and
(b) Interest on delayed payment of Levy @ 1% of such levy for every month or part of a month by which such payment is delayed in accordance to section 170.
For example: In case of delay of 2 month & 13 days, interest 1%*3 = 3% will be chargeable on the amount of Equalisation Levy.

What are the penalties for failure to deduct or pay Equalisation Levy under section 165

Section 171 of the Act prescribes the following penalties for failure to deduct or pay Equalisation Levy u/s 165:
(a) Failure to deduct Equalisation Levy u/s 165: Penalty equal to the amount of levy failed to be deducted (in addition to interest and the amount of levy outstanding)
(b) Failure to deposit Equalisation Levy after deduction: Penalty equal to Rs. 1000 per day during which the failure continues subject to the maximum of the levy he failed to deposit (in addition to interest and the amount of levy outstanding)
(c) However, no penalties shall be imposed unless the assessee is given an opportunity of being heard.
(d) Further, the advertisement expenditure incurred shall be disallowed in the hands of the payer.

What are the returns to be furnished for reporting deduction of Equalisation Levy

(a) The person receiving the specified services shall furnish an annual statement containing all particulars, as prescribed in Form No. 1 on or before 30^th June immediately following that financial year.
(b) The Form should be signed and verified electronically under digital signature or electronic verification code.
(c) If Failure to furnish within the time allowed or notices any errors:

(i) He may furnish annual statement in Form No. 1 or revised statement at anytime before the expiry of 2 years from the end of the financial year in which the specified service was provided.
(ii) If the assessee fails to furnish annual statement, the A.O. may serve a notice upon the assessee requiring him to submit the statement, within 30 days from the date of service of the notice.

What are the consequences of non-furnishing of annual statement in Form No.-1 or furnishing false statement

(i) Penalty of Rs. 100 per day during the period such failure continues. However, no penalties shall be imposed unless the assessee is given an opportunity of being heard.
(ii) Prosecution: If a person files false statement, he shall be punishable with imprisonment for a term which may extend to 3 years and with fine.

Other General Provisions:

Sections Referred: